Political illiteracy

Alex is right:

The debate over the economy occurring within the Westminster bubble may now have become completely detached from anything that is happening in what the rest of us would recognise as the economy...The everyday “reality” as it is experienced by the rest of us has ceased to be relevant to the debate.

But I wonder: is the problem here merely one of economic illiteracy, or is it also one of political illiteracy too?

Here's what I mean.

The reason why many of us fear that deficit reduction is infeasible lies in the paradox of thrift; if enough people try to reduce their borrowing at the same time, the result isn't lower borrowing, but lower incomes.

This paradox, though, is a particular example of a general problem - that, sometimes, individuals' plans are incompatible: we can't all achieve what we want, even if each of those plans is reasonable in isolation.

It is this problem that makes politics necessary: politics is what happens when I want a quiet night in and you want a party.

However, there is a widespread failure to appreciate this. There is, as I've complained, a blindness to the problems of collective action. Such imbecility reached its apogee in 2012, when David Cameron said, during the threat of a tanker drivers' strike: “If there is an opportunity to top up your tank if a strike is potentially on the way, then it is a sensible thing if you are able to do that.” This failed to see that what was sensible for any individual would merely have led to queues, panic buying and shortages if everyone did it.

It would, however, be unfair to blame the Tories alone for this. In the public mind also, politics has ceased to be a matter of organizing our affairs to minimize conflicts and become a narcissistic display of self-righteousness. And of course, in the media politics has always been about Nick Robinson-type Kremlinology of who's up and who's down as much as about fundamental political questions.

This, I suspect, explains why Cameron's talk about the "nation's credit card" has been accepted by voters and the media: people can see that it's feasible for them as individuals to pay off their credit card, but don't see that it might not be so easy for an agent as big as the state to do so.

It also explains something else. All of us who have both brains and hearts knowthat our biggest economic problem is not the deficit but falling real wages and (not unrelatedly) mass unemployment.

However, in an age of narcissisism, this problem has become individualized: "You want a job? Look for one." "You want a pay rise? Get a better job." This is, of course, embodied in government policy aimed at making work pay.

The error in this approach is obvious once we ask the foundational political question: are plans compatible? Of course, any individual might well be able to improve their lot by better job search. But if we all did so the result would be merely falling wages (at least temporarily) as labour supply increased and frustration because the demand for labour falls well short of supply.

In this sense, therefore, the elevation of "the deficit" over the problem of low pay is not just economic illiteracy but political illiteracy too - a failure to see that is politics is (or should be) really about how to arrange affairs so as to make individuals' reasonable plans as compatible as possible.

This is one reason why economists such as me, Simon and Paul Krugman (I apologise for putting myself into such elevated company) are drawn into politics. It's because our economic problem is a fundamentally political problem - and people have forgotten what politics is. 

Comments

[SIS]

Personally, I define politics as the system by which power is distributed, and insofar as it deals with collective action problems, the decisions will be based on relative power (if I am powerful and have the allegiance of many armed men and I want a raging bender, my neighbors who want peace and quiet are going to have to be miserable and like it). Its direct relation to economics is the reality that control of resources is a form of power or influences ones power. As such, the two are completely inseparable and you are correct to think about politics: major economic changes are also major political ones, and vice versa.

[Jackart]

Wages aren't falling any more. There isn't mass unemployment. So... bollocks really. You're not even right in detail on this one. The government doesn't need to be the demand of last resort. And the deficit does need to be brought under control. Disappointing, Chris.

[Luis Enrique]

it's not bollocks Jackart, correcting those claims would not change the message. Real wages might have started ticking up but that's does not immediately mean the problem has gone away. Real household expenditure is still well down on 2006.Similarly, unemployment is still a problem, we have seen a large growth in self-employment on low wages, the woeful performance of income tax receipts is a clear symptom. The point that these problems are more pressing then the deficit still stands. Both parties are (claiming) to do more than responsible public finance management requires.

[Matt Moore]

I agree that politics exists in regions where collective action is necessary.

But I can forgive people's confusion here, since British government has in recent years instead been the production of ever more complicated ways of taking one man's money and giving it to another.

Defence, police, health insurance, social care insurance, deciding which side of the road to drive on, monetary policy, lighthouses, defining property rights, pollution. All problems with elements of collective action.

Education provision, healthcare provision, charity provision, regulating drugs, promoting "healthy" lifestyles, regulating the media, provision of television channels and programming. Not problems of collective action, but the greater part of what government does.

[Andreas Paterson]

Jackart - From the ONS (source): "Adjusted for inflation, weekly earnings decreased by 1.6% compared to 2013"

Wages are still falling.

[Andreas Paterson]

Here's the link: http://www.ons.gov.uk/ons/dcp171778_385428.pdf

[gastro george]

Andreas - those figures are for median earnings, do you (or does anybody) know if there is a breakdown by decile or similar? That, I think, would be even more interesting.

[chris]

@ Jackart - yes, the AWE index rose 0.1% in real terms in the year to Sept - which is hardly enough to offset the previous six years of falls. And this might well overstate actual earnings growth:
http://www.independent.co.uk/news/business/comment/david-blanchflower/david-blanchflower-why-we-wont-have-real-pay-growth-until-2016-at-the-earliest-9864272.html
And although official unemployment is below 2m, there's another 2.3m out of the labour force who want a job, and 1.3m part-time workers who want a full-time job. I reckon 5.6m people count as a mass.

[Icarus Green]

I wouldn't necessarily say that the idea of the collective has been banished totally in politics. Just over a year ago, Cameron was standing in front of parliament urging MPs and by default, the whole country to attack Syria in defence of freedom, democracy, tradition and some other horseshit. Likewise, government seems to have no problem spending billions on the ridiculous drug war for fear society would be corrupted or some other bollox. It basically seems they just dont like referring to the collective only when it necessary to actually materially improving peoples lives. Strange that.

[Ben]

For me money creation (through housing) has run ahead of productivity for some time. We have a disconnect. Either we let the money supply fall back by trashing housing or we inflate wages and shaft the boomers.

The productive capacity isn't there to justify boomer living standards through retirement to end of life. Something has to give.

Personally I say ramp up wages and pull the rug from under the boomers.

[Ralph Musgrave]

Ben,

It’s true that the money supply according to the OFFICIAL estimates thereof have run ahead of productivity. Trouble is that money is near impossible to define, thus the “estimates” are near meaningless. E.g. money in a deposit account which takes two months to access is counted as money in some countries, but not in others. And some people have excess amounts in current or “checking” accounts which they have no more intention of spending that those with money in the above two month accounts. Does that excess money count as money or not? I don’t see a clear answer to that.

Also, the increased money supply represents an increased desire by savers to pile up savings and increased desire / willingness by borrowers to borrow. As long as that’s done on a sustainable and responsible basis, I don’t see the harm.

[An Alien Visitor]

We live in an economic reality where cutting healthcare, or social provision is good for the economy, while increasing the output of tat provided by the private sector is good for the economy.

So the problem is the economic reality. We need to change reality itself, and not take it for granted, or bow to it's dynamics. In this way you always end up playing the game of apologists like Jackart (even if he represents its more cretinous and less subtle wing).

[Ben]

Ralph

Money comes into creation via the willingness to borrow (and the willingness to lend) in a world of fractional reserve banking.

It has nothing to do with "productivity" whatsoever. In the UK billions has been created via housing. Even small businesses have to put down as collateral on their first loan their house.

Alien - totally agree - the frame of reference is the problem. For example: rent up => imputed rent up => more GDP yet life is worse.

[rogerh]

As you suggest the real problem is not enough income. This has gone on for a long time with no obvious sign of going up. The income is not well spread either, but that seems a natural result of income shortage.

Both main parties are in a bind, they are peddling practically the same product - how to sell us the same tin of baked beans. Their only choice to place their own brand on it. As I see it Ed's brand is slightly grubby and dog-eared from having been on the bottom shelf a while. But Ed does have the biggest corner shop franchise. Cameron's brand is shinier and slicker but we know his beans don't taste of much, and many of his tins are dented or bloated. Plus ca change.

What people are going to find out from May 2015 is all the cans coming off the line have fewer beans still, less sauce, some woodchips thrown in and dog poo at the bottom - just don't tell anyone.

[UberLibertarian]

Alien Visitor. It's that production of tat, in your words, that generates the economic surplus that pays for healthcare and social insurance. It's either that (capitalism), or you generate your surplus thru slavery, we could call that leftism, if its easier, or you're rootin' around in the mud for something to eat.

[An Alien Visitor]

"It's that production of tat, in your words, that generates the economic surplus that pays for healthcare and social insurance."

This is exactly what I said. Our economic reality means we have to produce tat in order to be able to produce essential things. This is a perverse economic reality and this perverse reality needs challenging. Why you think this then amounts to the advocacy of slavery is anyone's guess.

But the fact you take for granted that we have to waste production in order to produce the things we need is testament to how ingrained this insanity is, and how this insanity appears to be perfectly rational.

Imagine an economy of 3 producers all producing at optimum efficiency - Adam, Bill and Charlie. Adam produces shiny glow in the dark balls that look good on a cold winter’s night. Bill provides all the food. Charlie is responsible for providing shelter and ensures that everything is kept clean and tidy. One day Charlie gets ill, soon things start deteriorating, dirt builds up, and the shelter starts falling down. The choice is does Adam or Bill cover for Charlie? Is it the shiny balls or the food? The uber libertarian rat who lives in the nearby river reckons Bill should stop producing the food and take over the duties of Charlie because without those shiny glow in the dark balls the whole economy will come crashing down.

[Ben]

Alien - the more I see of it the more I recognise neoliberalism as cult-like. The blind faith, the utter rejection of reason (typically with "it's counter-intuitive").

It's very clear to me that we have human capital and energy. We can either put that into solving things that are "just there" like cancer or better solar tech etc, or put it into working around man-made rubbish like the banking sector, which is clearly a huge waste of time.

[Mark]

I like banks. They allow you to see your numbers.

An alien visitor,

If 1/3 of the productive capacity of the economy were destroyed, if all of the workers engaged in agriculture died, then presumably market prices would reflect this and induce A and B to reposition themselves accordingly.
The question is, without that collapse in production, would B and C rather receive (and work for) glow balls, or more food, or more shelters, or some other product?
If you believe it is in their best interest to be paid in cancer cures (an entirely reasonable idea in my view) rather than large screen TVs, then surely it is incumbent upon you to persuade them of this fact.
Of course, you might argue that our political/economic system is constructed in such a way as to make it impossible for individuals to make such a choice - but I'm not so sure.
People always have the choice to say "I don't want this shit" and "I'm not doing that".
Sometimes a hard choice, but a choice none-the-less.
On the other hand, maybe a kind of humanitarian slavery wouldn't be such a bad thing. I mean, personally, I've spent more time in the last week playing Hearthstone on my ipad than I have curing cancer. Perhaps that does represent a failure of self-ownership?

[Simon Reynolds]

@jackart

Which deficit are you talking about when you say: "And the deficit does need to be brought under control."

UK government balance + UK private household balance + UK corporate balance + foreign balance = 0

All sectors can't be in surplus simultaneously.

The OBR is forecasting that UK households will go into deficit in 2014, and that the household deficit will then increase to around 3%, reaching 3.2% in Q1 2020. Does that lead to a "better" economy than when the UK government is in deficit? What effect will several years of household deficit at around 3% have on the economy?

Table 1.10

http://budgetresponsibility.org.uk/pubs/Economy_Supplementary_Tables_Dec2014.v2.xls

[gastro george]

Some heroic work being done by the foreign balance in that table - halving or thereabouts in 5 years.

[Abdullah]

'I ain’t got time for a bloody graph… This is the kind of stuff that people like you use to confuse people like us.'

Jackart has more in common with Russell Brand then he/she would like to admit.

[Simon Reynolds]

@gastro george

Interesting point -- if the foreign surplus doesn't halve by 2020, and Osborne achieves his aim of a 2% government sector surplus then households will be even deeper in deficit at around 7%.

@gastro george and Abdullah

If anyone -- for example, jackart and Osborne, but unfortunately the same applies to Miliband and Balls -- talks about "the deficit" without invoking sectoral balances there is no point listening to what they say.

It's like Krugman says (all right, in another context)-- these people might as well be wearing a flashing neon sign that reads: "I don't know what I'm talking about". They might as well be banging on about "the surplus". As John Aziz says at Pieria it is "tubthumping deficit buffoonery".

[gastro george]

My point was actually - and I should add a proviso that I don't understand modelling and I would presume that the sectors interact - that this implies an export-led recovery. This is extremely optimistic given current trends in the UK economy (there is no re-balancing) and foreign economies (downturn almost everywhere except the US). If there is no export-led recovery then, on the OBR figures, there would still be a deficit, even with austerity-plus.

[Simon Reynolds]

@gastro george

And it is a good point.

I'm no economist either -- but I do understand that the sectoral balances equation:

UK government balance + UK private household balance + UK corporate balance + foreign balance = 0

must be true -- it is not a behavioural equation so it doesn't need modelling.

Therefore, if some of those four sectors are in surplus others are necessarily in deficit.

jackart doesn't seem to understand this -- but that is no one's problem but his. Osborne ignores discussion of sectoral balances so that he can waffle endlessly about "the deficit" and the need for austerity plus. It is Osborne that is a problem for all of us here in the UK not the government deficit.